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US private credit defaults hit record 9.2% in 2025, Fitch says

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Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#231

Post by hedora »

adam_arthur wrote: post #210
JumpCrisscross wrote: post #202

Earlier quoted context omitted.

> Private equity has to be effectively a 0 before private credit takes any losses Technically yes. But the overlap between private equity as it's commonly described and private credit is slim. > average "recovery rate" for senior secured loans is 80% Oooh, source? (I'm curious for when this was measured.) > A loan modified and extended with added PIK that ultimately gets repaid is not a "true" default True. It's a re…

> Oooh, source? (I'm curious for when this was measured.) It depends when you measure, but you can Google around and find figures in the 60-80% range. 80% may have been a bit on the optimistic end of the range. But it's important to note that a "default" doesn't imply a 0. Of course this will depend on the covenants, underwriting standards, type of collateral. I would guess software equity collateral recovery rates a…

So, if I hold a bunch of Private Equity, and my holdings need a continuity of business loan, would I:

(a) have the holding take out the debt, exposing 100% of my stake

or,

(b) have the holding divest a piece of itself, giving me control of the existing and new entities, then have that piece take out the debt, exposing 0% of my stake?

I imagine any PE firm worth its salt would go with option (b).

Presumably regulators would sometimes try to block such deals, but I cannot imagine that happening during the current administration. (Do the regulators even still work for the US government? I thought they were mostly fired.)

Similarly, I can imagine the banks refusing to lend in scenario (b), but I cannot imagine bank leadership being allowed to make such a decision if the PE firm is politically connected to the current administration.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#232

Post by hedora »

NickC25 wrote: post #160
rvz wrote: post #136

Looks like we have another problem in the banking system once again, even before AGI has even been fully realized. We are definitely in the year 2000 in this cycle [0] and between now and somewhere in 2030, a crash is incoming. Let's see how creative the banks will get to attempt to escape this conundrum. But until then... Probably nothing. [0] http://news.ycombinator.com/item?id=45960032

>Let's see how creative the banks will get to attempt to escape this conundrum. They don't need to get creative, they just need to buy congress or the administration. Same as they've done every time things get messy. And you know what? It works every time.

Well, the question isn't "is there any consequence for the bank managers"? The answer to that is "No, never, not even during the French Revolution".

The question is "How long can they keep extracting money before the economy implodes?"

The people producing macroeconomic indicators in the US were fired about 6 months ago for putting out an honest report. Since then there's been very little correlation between public sentiment on the economy and the official indicators.

So, we're definitely in some sort of overhang situation, where the economy is imploding, but the stock market goes up. I think that's unprecedented in the US. In developing countries, when this happens, it usually leads to things like hyperinflation.

So, I guess the real questions are: "How do you short the dollar?", and "How can you tell when the banks start doing it?" so you know when to jump off the merry-go-round.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#233

Post by JumpCrisscross »

vondur wrote: post #225
JumpCrisscross wrote: post #201

Earlier quoted context omitted.

> Who is the intermediary Business development companies [0]. Blue Owl. BlackRock [1]. > are these buy side created SPVs? Great question! Not always [2]. [0] https://www.reuters.com/business/finance/private-credit-fund... [1] https://www.blackrock.com/corporate/newsroom/press-releases/... [2] https://www.datacenterdynamics.com/en/news/meta-secures-30bn...

Am I wrong thinking this is similar to the housing loan crisis of 2008? This is just another form of that "shadow banking" system isn't it?

> This is just another form of that "shadow banking" system isn't it?

Private-credit lenders are literally shadow banks [1]. But I'd be cautious about linking any shadow banking with crisis. Tons of useful finance occurs outside banks (and governments). One could argue a classic VC buying convertible debt met the definition.

That said, the parallel to 2008 is this sector of shadow banking has a unique set of transmission channels to our banks. The unexpected one being purely psychological–when a bank-affiliated shadow bank gates redemptions, investors are punishing the bank per se.

[1] https://en.wikipedia.org/wiki/Non-bank_financial_institution

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#234

Post by bryanrasmussen »

fairity wrote: post #193

So, if I’m following: Banks are lending to private equity firms to fund purchases of businesses. Many of these businesses are SaaS which means their valuations are tumbling. It seems possible that valuations tumble so much that the private equity owner no longer has any incentive to operate the business, bc all future cash flows will belong to the bank. What happens in practice then? Will banks actually step in and t…

Wouldn't they still owe interest to the banks on the money they borrowed, as well as the money they borrowed? I mean if all the money I make goes to the bank to pay off my mortgage my solution is not quitting my job, even though life is not very good under that situation.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#235

Post by [deleted] »

chii wrote: post #228
strangattractor wrote: post #220

Earlier quoted context omitted.

You can always tell when there is a problem. When things are fine the companies keep the profits to themselves. When things start to get dicey - foist it off onto retail investers. Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets. - Google AI

It's why as a retail investor, never buy things that would otherwise have not been available to you (but was to those "elite"/institutional investors previously). Think pre-IPO buy-in. Investors in the know and other well connected institutional investors get first dibs on all of the good ones. The bad ones are pawned off to retail investors. It's no different with private credit and private equity. These sorts of de…

[deleted]

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#236

Post by JumpCrisscross »

hedora wrote: post #227
JumpCrisscross wrote: post #214

Earlier quoted context omitted.

> the banks' lending to the private credit firms is subject to the same regulations and constraints as their lending to other borrowers Yes. > the same regulations and constraints that led them not to lend to the underlying borrowers in the first place No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks. > When banks lend to private credit funds/firms, it ten…

> secured loans which will be less risky than the underlying loans So, it's sort of like bundled mortgage securities, where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting. Presumably, since banks (by definition, an intermediary) are involved, those are then recursively repackaged until they hav…

> where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting

Yes. This is mathematically sound.

> those are then recursively repackaged until they have an A+ rating, or some such nonsense, right?

AAA-rated CLOs performed with the credit one would expect from that rating.

The problem, in 2008, wasn't that the AAA-rated stuff was crap. It was that it was ambiguous and illiquid.

> I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans

Defining independence in financial assets like this is futile.

> there's no chance of correlated defaults in a bucket of bad business loans that's structured this way

Software companies being ravaged by AI fears.

> replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression

It also describes a lot of successful finance that doesn't reach the mainstream because it's phenomenally boring.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#237

Post by smallmancontrov »

npilk wrote: post #107
JumpCrisscross wrote: post #99

Reason this number caught my eye: last year the Fed's stress tests found "loss rates from [non-bank financial institution] exposures (i.e., the percentage of loans that are uncollectible) were estimated at 7%, under a severe recession in scenario one" [1]. That's the scenario in which unemployment goes to 10%, home prices crash by 33%, the stock market halves and Treasuries trade at zero percent yield [2]. [1] https:…

What's odd is according to the article, this index estimated an ~8% default rate in 2024. So maybe the stress test was measuring something different? It's weird to think the stress test would find a lower loss rate during a severe recession than in the most recent year with data available.

The regulators were modeling a scenario where private credit was dragged down by a problem elsewhere in the economy, not one where the rest of the economy was dragged down by private credit. Everyone understands that center of a financial implosion is always worse than its effects on the broader economy, but regulators aren't tasked with stopping the explosion at ground zero, they are tasked with stopping contagion dominoes from falling, so that's what they model.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#238

Post by miketery »

bryanrasmussen wrote: post #234
fairity wrote: post #193

So, if I’m following: Banks are lending to private equity firms to fund purchases of businesses. Many of these businesses are SaaS which means their valuations are tumbling. It seems possible that valuations tumble so much that the private equity owner no longer has any incentive to operate the business, bc all future cash flows will belong to the bank. What happens in practice then? Will banks actually step in and t…

Wouldn't they still owe interest to the banks on the money they borrowed, as well as the money they borrowed? I mean if all the money I make goes to the bank to pay off my mortgage my solution is not quitting my job, even though life is not very good under that situation.

The business owes the money or the fund. In any case the individuals do not unless they backed it with personal collateral.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#239

Post by mikkupikku »

spacecadet wrote: post #184
mikkupikku wrote: post #45

Earlier quoted context omitted.

[flagged]

What cope? I work in AI, write code with AI, promote the use of AI... Im just a pragmatic realist man. Not a delusional cool aid drinker...

You're coping. Two years ago they could barely write software. These days they do it just fine.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#240

Post by _heimdall »

vondur wrote: post #225
JumpCrisscross wrote: post #201

Earlier quoted context omitted.

> Who is the intermediary Business development companies [0]. Blue Owl. BlackRock [1]. > are these buy side created SPVs? Great question! Not always [2]. [0] https://www.reuters.com/business/finance/private-credit-fund... [1] https://www.blackrock.com/corporate/newsroom/press-releases/... [2] https://www.datacenterdynamics.com/en/news/meta-secures-30bn...

Am I wrong thinking this is similar to the housing loan crisis of 2008? This is just another form of that "shadow banking" system isn't it?

You'll find plenty of talking heads on YouTube right noe claiming exactly this. Time will tell if private equity is actually wound up as tight as housing was in the GFC.
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